Natalie Smolenski: A central bank cryptocurrency? The U.S. should reject it

(Natalie Smolenski is a Dallas-based startup founder. She also founded the Texas Bitcoin Foundation, a public charity, and co-founded the Texas Blockchain Council, a trade association. She is also a senior fellow at the Bitcoin Policy Institute.) The introduction of bitcoin and other cryptocurrencies has led the U.S. Treasury and Federal Reserve to ask: Why shouldn’t America roll out digital cash — or Central Bank Digital Currency — with the same technology used for these privately issued currencies? After all, anyone can create a shared digital ledger and issue their own currency on it. But not all cryptocurrencies are created equal. Some, like bitcoin, prioritize the privacy and autonomy of the individual by enabling free transacting without trusted third parties. Other cryptos — including CBDCs — are built to be fully programmable — controllable — by the trusted third party that issues them. This is a major difference, and governments are counting on the fact that most people don’t know it. The goal of CBDCs is to eventually replace paper cash — the last vestige of private financial transacting. CBDCs are issued on centralized digital ledgers that give governments full visibility into every cash transaction conducted by anyone, anywhere in the world. Every transaction is fully identity-verified.

CBDCs can also be programmed to only spend with government-approved vendors for government-approved purchases. Central banks can directly implement negative interest rates on CBDCs to punish saving — Americans could see, for example, 2% shaved off of our cash balances every day, week, or month — however often the Fed wants in order to “stimulate” spending. And of course, nothing prevents the government from simply confiscating your cash at any time. Certainly, the U.S. dollar is already fully digital in today’s global banking system and the government could simply direct private banks to implement all of these policies already. But the fig leaf of separation between commercial bank money and central bank money makes this kind of control politically and procedurally more difficult. With a CBDC, those roadblocks would be removed, and the government would have direct control over the cash in consumer bank accounts. It is not surprising that authoritarian governments like China and Russia are implementing CBDCs. But liberal democracies want to implement them, too. In a talk at Columbia University, the president of the Minneapolis Federal Reserve, Neel Kashkari, said: “If they want to monitor every one of your transactions, you could do that with a Central Bank Digital Currency; you can’t do that with Venmo.